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Ottawa – Measuring the impact of an industrial structure on productivity requires estimates of differences in productivity across size classes, according to a new study by Statistics Canada.

The study, ‘Canadian Labour Productivity Differences across Firm Size Classes, 2002 to 2008’, provides labour productivity estimates for Small, Medium-sized and Large firms in the Canadian business sector. These are defined as 0 to 99, 100 to 499 and 500 employees or more.

The share of both gross domestic product (GDP) and hours worked in Small and Medium-sized firms remained larger than that of Large firms from 2002 to 2008. However, the share of Small and Medium-sized business sector GDP declined from 55.6% in 2002 to 52.1% and the Small- and Medium-sized firm share of hours worked declined from 71.6% in 2002 to 68.4% in 2008.

Large firms had considerably higher labour productivity, defined as GDP per hour worked. For the total business sector, labour productivity in 2008 was $71.6/hour in large firms, compared with $42.3/hour in Medium-sized firms and $34.6/hour in Small firms.

Large firms have a greater presence in industries that require substantial capital. The scale effects are sufficiently important that Small firms and Medium-sized firms in capital-intensive industries experience larger productivity disadvantages. In 2008, their labour productivity was about half that of Large firms in these industries.

On the other hand, nominal GDP per hour worked of Small and Large firms differed by less in the services sector, where Large firms accounted for a much lower share of total GDP and hours worked. Overall, Small firms in these industries were about 77% as productive as Large firms in 2008, while Medium-sized ones were about 90% as productive.

Canadian labour productivity in Large firms increased between 2002 and 2008 at an average rate of 3.8% per year. In contrast, the productivity of Small firms increased at an annual rate of 4.7% per year. The labour productivity of Medium-sized firms increased at an average of 2.4% per year.

The gap between labour productivity of Small and Large firms narrowed in industries where Large firms were less dominant. This catch-up phenomenon was less prevalent in industries where Large firms were more important (mainly capital-intensive industries) such as mining, oil and gas, utilities, manufacturing, transportation and information.

An economy that is characterized by a smaller share of small and less productive firms will have a higher aggregate level of productivity. Using the results for 2002, the study shows that if the share of hours worked in Large firms had increased by 10%, aggregate labour productivity in the total business sector would have risen by about 2%. A 25% increase in the share of hours worked in Large firms would yield a gain of about 4% in labour productivity.